Not only is GM looking to convert non secure payments due in 2003 into debt instruments, as part of the deal to get relief on the 2003 obligations, they appear willing to give GM conversion on payment obligations well into 2007 (200 million), which according to you, they (XMSR) should be UFCF positive.
Fundamental in this process is that previously XM had been attempting to obtain a year's funding at a time. Now, they have decided to obtain ALL funding necessary to carry them through cash flow breakeven in one shot. GM has agreed in principle to converting the operating liabilities to LTD pending XM's arrangement of an additional $200M from another source; whether there will be a conversion option is yet to be seen. However, I'd much prefer to see a future conversion option than further dilution prior to breakeven.
All that said, anyone in this stock SHOULD be expecting further dilution, because the game plan from minute one has called for an additional $600M in financing before breakeven and my assumption has always been that it would dilutive.
Well, except accrual of interst (but we will have to see the terms to make a call on this), but why would you let them convert furture payments due 4 years down the road into interest accruing debt TODAY ? 2003 and 2004.
This isn't going to happen.
GM gets security of out the deal. But, that would give me kind of an uneasy feeling knowing they wanted debt instead of stock at these prices.
It is precisely the reason for the existence of convertible debt instruments -- as an incentive for an otherwise borderline lender to make a loan.
This arrangement is as much for the benefit of XM as it is for GM; XM is going to have a much tougher time getting financing for its other (non-GM) short-term needs when they've got this near-term liability due GM. By making it long-term (which more closely relates to the underlying asset anyway), other potential lenders are going to be much more approving. When the agreement with GM was entered into, it probably should have been structured as LTD anyway, because clearly, the underlying costs relate to the long-term rather than the next few years.
Why wait in line with the other pre-petition debt holders for the scraps left over when they can just wait a couple of months and provide DIP financing?
Could happen this way. For me, I think I'm going to gamble a little more on this. My sense is there are a lot of parties (for example, Oppenheimer) who would be willing to get in a little deeper on XM to avoid having to take a loss, that frankly, it is clear they can avoid if the financing comes through.
We'll see, I guess... and one thing is for sure. It isn't going to be long before we know...
One point I'll cede; after listening to the conference call, I was put off by management's dodging of the question about "What is your contingency plan" if the money doesn't come in. While I think the answer is obvious, I'd like to have heard them address it... |
